David Cay Johnston

Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS.

Go figure. Cutting the IRS budget by more than 5 percent in real terms makes as much sense as a hospital firing surgeons or a car dealer laying off salespeople when customers fill the showroom.

Shrinking the IRS makes sense if you believe government is too big and that cutting everywhere is the best way to shrink government. But this is the staff that generates revenue, and there is easy money to be made.

Congress should listen to the national taxpayer advocate, a position it created to make sure taxpayers had a voice in how the IRS operates. In her annual report, released last week, advocate Nina Olson said Congress needed to “ensure that the IRS continues to be effective, either by reducing the IRS’ workload or by providing adequate funding to enable it to accomplish its assigned mission.”

Instead of cutting, we should be expanding the revenue-generating staff because there is plenty of tax money to be had, even in this awful economy.

IRS data show that auditors assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year. The highest-paid IRS auditors make $71 an hour. Based on a 2,080-hour work year, that works out to around $19 million of lost revenue annually for every senior corporate auditor position cut from the payroll.

WHY CUT?

It makes no economic sense to trim the ranks of auditors who generate more than a hundred times their annual salaries. Run a business that way and you go broke.

So why would President Barack Obama and Congress cut the IRS budget? Their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns. Then there is the growing army of corporate lobbyists and the Supreme Court’s decision in Citizens United, which allows corporations (and unions) to spend all they can afford on influencing elections.

Keep in mind the IRS costs just a half penny for each dollar of tax collected. Its proposed $11.8 billion budget would be less than the Agriculture Department spends each month.

If the IRS budget is cut, the losers will be workers and ordinary investors, who will find it harder to get their questions answered and their problems resolved by the agency. On the whole, these people do not cheat on their taxes because their incomes are easily checked — through reports by employers, mortgage banks and others. Under a law taking effect in stages between last year and next, brokerages must report the cost basis of securities. This change will reduce capital gains cheating.

TAX CHEATS

The winners will be tax cheats among sole proprietors and other business owners, who are subject to less verification. The latest IRS tax gap report, issued Jan. 6, estimates that just one percent of wages escapes tax, while 56 percent of “amounts subject to little or no” verification do so.

America’s biggest corporations, those with more than $250 million in assets, also may escape some tax if the IRS budget is cut. These nearly 14,000 companies pay about 86 percent of corporate income taxes.

Audits of these big firms were down even without a budget cut. And audits have become far more complicated, partly because Congress changed the tax code more than once a day on average from 2001 through 2010, Olson reported.

From 2005 to 2009, hours spent auditing the biggest corporations declined by 33 percent, according to IRS records analyzed by the Transactional Records Access Clearinghouse at Syracuse University in New York.

Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it numbers 95,000 and is on the way to about 90,000. The likelihood of a big company being audited has plummeted 50 percentage points from 72 percent in 1990 to 22 percent in 2010.

Big company audits are now limited to specific issues known to the companies in advance, not unlike when cops tip off owners of favored gambling dens before a raid. Each audit also begins with an “estimated time to completion.” Working auditors tell me this is really a hard deadline that allows companies to run out the clock with delays in producing documents.

Some IRS tax detectives privately ridicule this system, calling it “audit lite.”

Whether you like the corporate income tax or think it is an abomination, failing to enforce it with the same rigor as taxes on wage earners and most investors is indefensible on economic, budget deficit and moral grounds.

IRS budget cuts worsen budget deficits and send a corrosive signal that only chumps file honest tax returns. So you have a choice. Do nothing and suffer the consequences or call your congressman, senators and the White House — today — and then vote in politicians who support, rather than undermine, tax law enforcement.

Big business is lobbying for a major cut in the corporate income tax rate, and both President Barack Obama and key congressional leaders are on their side. But the evidence that a rate cut will boost the economy is weak. What’s needed is comprehensive reform that includes a simpler, fairer and more transparent corporate tax code. But more on that later.

Consider what President George W. Bush‘s Treasury Department said in a report in 2007: big countries, such as the United States, receive far less economic benefit from lower corporate tax rates than smaller countries do. For large countries, cutting corporate tax rates “would result partly in increased capital inflow and partly in lower world interest rates.”

While other large countries have cut their corporate tax rates since then, lowering the U.S. rate would just encourage other countries to go even lower. Since we are cutting spending in the very areas that build wealth – education, infrastructure and research – a corporate tax rate cut would increase the pressure for further cuts in those areas, making us poorer.

The RATE Coalition, a group of 23 businesses and two trade associations, is among leading advocates for a cut in the corporate income tax rate from the current 35 percent. But it also wants that cut to be a part of fundamental reform.

A cut of 10 percentage points would increase economic output by 1 to 2 percentage points, the coalition says on its website, citing a study by economists Roger H. Gordon of the University of California San Diego and Young Lee of Hanyang University in Seoul. But Gordon told me that while the paper shows that “lower corporate tax rates are associated with more rapid economic growth,” that point comes with a caveat.

“We found these results only … for non-OECD (poorer) countries,” he emailed – there was no statistical relationship between lower corporate tax rates and faster economic growth among OECD countries, a coalition of 34 modern states spanning the globe and including the United States.

LITTLE DIFFERENCE

Ten of the RATE members have made detailed tax disclosures to shareholders, allowing Citizens for Tax Justice to compare their tax rates on profits earned in the United States to their rates on overseas profits. Its recent study showed that five of the 10 RATE members paid higher rates on their U.S. profits than on their foreign profits in 2008 through 2010. The other five paid lower U.S. tax rates.

Add up the figures from all 10 companies and their average U.S. tax rate was just 0.88 percentage points higher than their non-U.S. rate. That is not much of a difference, either to the companies or the U.S. economy.

The RATE Coalition has two chairs, one from each party, each with strong Washington ties. Its spokeswoman offered Democrat Elaine Kamarck, a public policy lecturer at Harvard’s John F. Kennedy School of Government, to answer questions. Kamarck said that the enduring economic doldrums and election year politics this year “almost inevitably lead to a big tax reform debate in 2013.”

“We see an interesting political consensus,” she said. Corporations want lower rates, the government needs more revenue and since the 1986 Tax Reform Act the corporate tax laws have become overgrown with favors, especially for multinational companies. Getting lower rates, she said, has to include removing many favors to level the playing field so profits are taxed evenly, not more for some industries and less for others as today.

Significantly, the RATE coalition, one of several corporate coalitions competing to shape changes in tax law next year, includes associations of retailers and railroads, both of whose tax issues are almost entirely domestic. Some of its members have spoken against the proposed tax holiday for bringing home untaxed overseas profits. The coalition does not oppose any repatriation deal for multinational companies, but says such a deal should be debated only in the context of fundamental reform.

Kamarck said she agreed with one of the major themes of this column – which is that our tax code was built for the national, industrial, wage economy of the 20th Century, creating problems for the global, services, digital economy of the 21st Century.

So why is the RATE Coalition not first promoting fundamental reform, a tabula rasa approach, and only then talking of tax rate cuts? That, she said, is just not politically doable in the next two years. Let’s hope she is wrong. Washington has done it before, in 1986. Why not again?

By David Cay Johnston

The views expressed are his own.

Some of the biggest companies in the United States have been firing workers and in some cases lobbying for rules that depress wages at the very time that jobs are needed, pay is low, and the federal budget suffers from a lack of revenue.

Last month Citizens for Tax Justice and an affiliate issued “Corporate Taxpayers and Corporate Tax Dodgers 2008-10″. It showed that 30 brand-name companies paid a federal income tax rate of minus 6.7 percent on $160 billion of profit from 2008 through 2010 compared to a going corporate tax rate of 35 percent. All but one of those 30 companies reported lobbying expenses in Washington.

Another report, by Public Campaign, shows that 29 of those companies spent nearly half a billion dollars over those three years lobbying in Washington for laws and rules that favor their interests. Only Atmos Energy, the 30th company, reported no lobbying.

Public Campaign replaced Atmos with Federal Express, the package delivery company that paid a smidgen of tax — $37 million, or less than one percent of the $4.2 billion in profit it reported in 2008 through 2010.

For the amount spent lobbying, the companies could have hired 3,100 people at $50,000 for wages and benefits to do productive work.

The report – “For Hire: Lobbyists or the 99 percent” – says that while shedding jobs, the 30 companies are “spending millions of dollars on Washington lobbyists to stave off higher taxes or regulations.”

These and other companies have access to lawmakers and regulators that are unavailable to ordinary Americans.

CALL CONGRESS

Doubt that? Dial the Capitol switchboard at 1 (202) 224-3121, ask for your representative’s office and request a five-minute audience, in person, at the lawmaker’s convenience back in the home district.

In more than a decade of lectures recommending this, I have yet to have a single person email me (see address to the right) about having scored a private meeting with the representative called.

Corporations have vast resources to pour into ensuring access — resources that expand when little or no taxes are paid on profits thanks to rules they previously lobbied into law.

Companies form nonprofit trade associations, hire former lawmakers and agency staffers, and have jobs to dole out to lawmakers after they leave office and to friends and family while they’re in office. Thanks to the Supreme Court’s Citizens United decision, corporations can now pour unlimited sums into influencing elections. So can unions, but they are financial pipsqueaks compared to companies.

Then there are political action committees, or PACs, to finance campaigns as well as donations by executives and major shareholders.

Combine all this and you have a powerful formula for making rules that favor corporate interests over human interests, something that the framers of the U.S. Constitution understood more than two centuries ago.

James Madison wrote disapprovingly in 1792 of “a government operating by corrupt influence, substituting the motive of private interest in place of public duty” where eventually “the terror of the sword, may support a real domination of the few, under an apparent liberty of the many.”

FEARS COME TRUE

The late U.S. president’s fears have come to life. For swords, just substitute police with rubber bullets, batons and pepper spray at Occupy demonstrations, including perfectly peaceful ones.

Company reports to shareholders show that among the 30 companies in the Public Campaign report, the 10 firms that spent the most on lobbying during the same three-year period fired more than 93,000 American workers.

Those firings took place in an economy that had five million fewer people with any work in 2010 than in 2008.

All those firings mean higher costs to taxpayers to support those unable to find work, including the more than 4.2 million Americans who are now persevering by applying for jobs after more than a year. Millions more have given up and are no longer counted among the unemployed.

Federal Express spent $25 million lobbying to protect a rule that makes it virtually impossible for its express delivery workers to unionize. That’s 67 percent of what it paid in taxes.

FedEx says it was “educating lawmakers” about a proposal “that would cripple competition in the express delivery industry and hinder our nation’s future economic success.”

The Teamsters, who represent drivers at United Parcel Service, say FedEx was protecting a special interest rule that shorts workers. UPS pays its unionized drivers 53 percent to 104 percent more per hour than FedEx does.

The United States already ranks second among modern nations, just behind South Korea, in the share of its workers in low-wage jobs while too many companies lobby for ever lower taxes, ever smaller wages and ever fewer worker rights to protect the mighty torrents of greenbacks flowing into their coffers. A better balance would make America better off.

PHOTO: Occupy DC movement protesters rally outside the U.S.  Capitol in Washington December 8, 2011. REUTERS/Yuri Gripas

By David Cay Johnston

The views expressed are his own.

A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.

Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.

Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.

While the United States has one of the most effective tax regimes, especially for on-the-books wage earners and pensioners, and one of the smallest underground or shadow economies, it has the largest amount of tax evasion measured in dollars.

Murphy’s report covers 145 countries that generated $61.7 trillion of gross product, 98.2 percent of the world total. The 145 countries had only 61.7 percent of world population, a reminder of how poor the more than 2.7 billion people in the other 90 countries are.

Murphy estimates U.S. tax evasion at $337.3 billion, 10.7 percent of the global figure and close enough to the official Internal Revenue Service tax gap estimates to be credible.

The United States has lower tax rates than eight of the nine other top 10 tax evasion countries. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.

WHY NO PROSECUTIONS?

Another sort of financial crime was discussed when Steve Kroft, interviewing Obama for CBS’s “60 Minutes,” cited a poll showing that 42 percent of Americans believe Obama’s policies favor Wall Street. Kroft said he suspects that is because “there’s not been any prosecutions, criminal prosecutions, of people on Wall Street.”

Obama deftly avoided the issue. “Some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”

Shame on Kroft for not following up with the obvious question: “Where are the prosecutions of those who did commit crimes, Mr. President?”

There is no need for new laws to rein in fraud, the evidence of which is pervasive, reported in detail by our savviest journalists, thoroughly documented in academic reports and in all manner of official government reviews.

Obama then ever so subtly shifted gears, telling Kroft “and that’s why we put in place the toughest financial reform package since FDR and the Great Depression. And that law is not yet fully implemented…”

Obama’s words neatly conflated two separate issues.

One is atrocious business judgment that should have wiped out the wealth of those who invested in the speculative derivatives casinos. That might have restored Wall Street as a home to investment houses that marshaled capital for productive investments.

The other issue is fraud.

Juries often fail to grasp arcane regulations. A crime so complex that it takes a prosecutor a day for her opening argument invites reasonable doubt. But fraud is something juries do get. Show a jury falsified records and bald-faced lies in disclosure documents, then toss in testimony from insiders who pointed out the wrongdoing only to be told to shut up — or who got fired — and convictions follow.

A GROWTH INDUSTRY

We know this because during the savings and loan crisis two decades ago juries convicted in more than three thousand cases, including more than a thousand major felony cases committed by senior insiders.

The man most responsible for those convictions was Bill Black, a federal banking regulatory lawyer at the time who now teaches about white-collar crime as a professor at the University of Missouri-Kansas City law school.

So has Obama or his Justice Department sought Black’s advice? “No,” Black told me.

Instead Obama leans on Treasury Secretary Timothy Geithner, who was worse than a sightless sheriff when he presided over the Federal Reserve in New York. Geithner not only failed to stop the looting, he actually shut down investigators who were onto the frauds because he said he worried that the institutions he was supposed to regulate were too fragile to withstand scrutiny.

The worst part of this is that the statements of the leading Republicans seeking to succeed Obama, a Democrat, make clear they have no interest in putting Wall Street criminals behind bars either.

Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.

Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.

By David Cay Johnston

The views expressed are his own.

In nearly all 34 countries with modern economies, inequality is rising, a new study by the Organization for Economic Cooperation and Development shows. The gap is especially pronounced in the United States where the country’s largest program to alleviate poverty may be adding to the problem, not alleviating it.

The United States ranks fourth in income inequality after Chile, Mexico and Turkey. In the U.S. the best-off 10 percent make on average 15 times the incomes of the poorest 10th, compared to a six to one ratio in the Nordic countries, Austria, Hungary and Switzerland.

The OECD report, published on Monday, cites the U.S. earned income tax credit as an explanation for a sharp increase in the hours worked by low-wage Americans.

The tax credit, the largest U.S. program to alleviate poverty, is meant to be an incentive to work, but it may also contribute to poverty, effectively holding down wages of all low-skilled workers. Now how is that?

Imagine that more people whose skills limit them to low-paid work decide to work more hours so they can get the credit. Add in people who have the skills for better-paid work but cannot find it and so take lower-paid jobs because of the implicit supplement to their wages provided by the earned income tax credit.

The result is more workers seeking more work, allowing employers to hold back wage increases or even reduce wages because of the enlarged supply of labor. The employers benefit. The American median wage, in 2011 dollars, has hovered at just above $500 per week for more than a decade.

Add in the elimination of America’s largest welfare program 15 years ago, Aid to Families with Dependent Children, and the labor market is flooded with single mothers with few job skills. This not only holds down their pay, it also tends to depress the wages of all low-skilled workers.

DECENT LIFE UNAFFORDABLE

A pernicious problem in America is people who work but whose wages are too low for them to afford a decent life.

One in four Americans earns low wages — less than $11 an hour. Among modern countries only South Korea has a larger share of its workers in low-wage jobs and then only by a smidgen, according to a new study by John Schmitt of the Center for Economic and Policy Research, a liberal leaning economics policy organization in Washington.

Schmitt’s work shows that the share of American workers earning less than two-thirds of the median wage has been slowly increasing since 1980, a trend that also goes to the decline of unions due to anti-worker laws enacted by Congress.

The problem is not indolence, the OECD report shows.

America’s lowest paid workers, the bottom fifth, are working far more than they once did. In 1986 they put in 1,030 hours, a bit more than half time. By 2004 they were up to 1,300 hours. That is an increase of 26 percent.

Significantly, in almost every other country in the OECD study, hours worked by the poor fell.

DEPRESSED WAGES

The data indeed show that the flood of low-income workers, especially single mothers, is depressing the wages of all low-skill workers. One of four Americans with a job earns less than $15,000 and average income is less than half that.

Research by Professor Bruce Meyer of the University of Chicago Harris School of Public Policies shows that the largest increase in low-wage work was among single mothers with three or more children. In place of AFDC, as it was known, Congress in 1996 adopted Temporary Assistance to Needy Families with a maximum of 60 months of assistance.

Providing day care for children or poor working mothers has become a growing subsidy expense borne heavily by federal and state governments. In many cases the cost of child care, especially when a single mother has two or more children, exceeds what she can earn even working fulltime.

The earned income tax credit has grown rapidly and now benefits 26 million low-income individuals and families, primarily single parent households. The annual cost is approaching $60 billion.

Milton Friedman, the Nobel prize-winning Chicago School economist, proposed what became the EITC, a form of negative income tax, to encourage people to work. He noted that many people on welfare faced marginal tax rates of more than 100 percent if they left the dole for low-wage jobs. President Ronald Reagan championed the EITC because it required people to work to get benefits.

The credit provides its greatest benefits to people making from about $10,000 to $14,000. Earn more and the credit falls off. Work 1,300 hours at $10 an hour and you are in the sweet spot to get the biggest tax credit. Work an extra week and benefits slip.

If the earned income tax credit, combined with the end of welfare as we knew it, hold down wages for low-skill workers then it is time to find smarter ways than Chicago School theories to reduce poverty for those who work.

By David Cay Johnston

The opinions expressed are his own.

Slyly encouraged by President Barack Obama, Republicans have painted themselves into a tax corner.

Who would have imagined a year ago, when Republicans rode the Tea Party’s anti-tax wave and retook the House of Representatives, that a year later Republicans would be forced to swallow a huge tax cut sponsored by Obama?

The irony is that Obama’s payroll tax cut could have been taken over by the Republicans as their issue, but they flubbed it.

The payroll tax cut, which bestows the most savings on highly-paid workers, resulted from the refusal by Republicans, after they won control of the House in 2010, to extend the Making Work Pay tax credit.

The Making Work Pay tax credit’s benefits went heavily to the working poor, the disabled, and retirees while in effect in 2009 and 2010.

In September, Obama asked Congress to cut the payroll tax rate even further. Obama wants the 6.2 percent Social Security wage tax slashed in half, saving $1,550 for workers making $50,000. He also wants to cut the employer side of the tax in a way that favors small business.

Republicans quickly rejected the proposals to expand the cut, which is how they started painting themselves into a corner both with workers and with small business owners.

REPUBLICANS AT RISK

With the collapse of the doomed-before-it-began super committee, the Republicans suddenly were at risk that the payroll tax rate would rise automatically in January, allowing the Democrats to portray Republicans as the party of tax hikes for working people and tax cuts for billionaires.

In recent days House Republicans have signaled that they will support extension of the reduced payroll tax rate, but grudgingly. Tea Party House Republicans continue to oppose the payroll tax cut extension so it is not certain the payroll tax cut will be extended, though that would certainly damage the Republican tax-cut brand.

Congressional Republicans, most of whom have signed the no-tax-hike pledge of lobbyist Grover Norquist, have made no secret of wanting tax cuts at the top. Some want to end the corporate income tax and to slash or eliminate taxes on capital gains, dividends, rents, interest and some royalties.

But numerous opinion polls show overwhelming public support for continuing tax cuts for workers and for raising taxes on millionaires. That has left Republican leaders no choice but to silently cry uncle and agree to the president’s request to extend and possibly expand the payroll tax cut.

Having outsmarted Norquist, Obama gets to run for a second term as the champion of at least a $100 billion tax cut. Obama can even say that if Republicans had had their way, working people’s taxes would have gone up while taxes on billionaires would have gone down. And he gets to tell small business owners that, but for Republicans, their taxes would have gone down too.

This is a marketing fiasco for Republicans to rival the Ford Edsel and New Coke. Already more than 40 congressional Republicans have taken steps to distance themselves from Norquist, who scowls at the mere mention of what could have been his, but is now Obama’s, very popular tax cut.

REGRESSIVE FEATURES

The Republicans will have a harder time tarnishing Obama as a progressive because they insisted on killing his Making Work Pay tax credit.

The payroll tax cut that they ultimately accept would have some of the defining features of the 2001 and 2003 Bush tax cuts — almost everyone who paid taxes got a break, but most people got very little while huge savings flowed to the top. Just one in a thousand taxpayers got 12.5 percent of the savings.

In the same vein, Obama’s payroll tax cut benefits everyone who has a job, but most workers get a pittance. The lowest paid 38 million Americans, the one in four workers who earn less than $10,000 a year, will save on average less than $80 each. Only 45 percent of the savings go to 75 percent of workers, those making under $50,000. But the top 4.8 percent get 16.3 percent of the tax savings, my analysis of the plan shows.

Applying the expected 2012 payroll tax rules to the latest wage data, from 2010, two-income professional couples who each make more than $110,100 would save $4,404 next year. That looks to be about two million households.

These high-income couples were denied Obama’s Making Work Pay credit in 2009 and 2010. That tax cut, which polls indicate hardly anyone knew about, was heavily weighted to benefit the lowest income workers. Everyone except the top 3 percent or so got the $400 tax break.

The switch from the Making Work Pay tax break to the reduction in the payroll tax effectively raised taxes on 51 million households, the Tax Policy Center estimated, by an average of $134 each.

Raising taxes on a third of American workers poses a problem for Republicans who want to be known as the party that never raises taxes — but only if voters know what Republicans did.

Norquist tries to explain this away by saying his pledge does not apply to temporary tax cuts. However, Norquist takes the opposite approach when he talks about the Bush tax cuts, which he says were intended to be permanent, even though Republicans did not make them so when they controlled Congress and the White House from 2003 through 2006.

In this and other ways Norquist damages the brand he created, muddying it with inconsistencies and dubious caveats few voters will grasp.

He and his followers are now stuck in the corner into which they thoughtlessly painted themselves — at least until the political paint dries in November of next year.

PHOTO: White House Press Secretary Jay Carney looks at a countdown clock counting the days until the payroll tax cut expires, in the briefing room of the White House in Washington December 5, 2011. REUTERS/Joshua Roberts

The author is a Reuters columnist. The opinions expressed are his own.

Taxpayers have much at risk in the coordinated action that six central banks took this week to lower short-term interest rates and make it easier to issue dollar-denominated loans to cope with the European debt crisis.

The joint action on the last day of November is being characterized widely as buying time to deal with the European government debt crisis. But fears about whether the PIGS — Portugal, Italy, Greece and Spain — can pay back their debts in full are just a symptom of a metastasizing economic disease that has been plaguing the West for three decades. That is where the risks to taxpayers come in.

The disease was man-made, a policy virus cooked up by the Chicago School, where leading theorists persuaded the world to cast aside four millennia of human experience in favor of their radical legal and economic ideas. They have achieved this by couching their plans in language that made them seem conservative when the theories were the antithesis of conservative, at least in the classic meaning of that word.

Among these ideas is that inflation is everywhere a government-created evil that must be fought at all costs, that financial institutions operate best with little to no regulation and that fraud laws are an anachronism in securities markets. In line with this, deflationary pressures are ignored and prudent investment houses become casinos charging hefty fees for derivatives that by their nature destroy wealth while frauds flourish in the form of mortgage securities perpetrated by banks and Wall Street.

The damage is now done. The price must be paid.

WHO WILL PAY?

Who bears this price will determine whether we face the scary risk of inflation or the even scarier prospect of deflation. Will those who benefited from these policies bear the price? Or, as with the 2008 U.S. financial meltdown, will it be taxpayers?

To understand the damage from the idea that regulation is bad and no regulation is good, one need only look at the data analyzed by David Moss, a Harvard Business School professor. Moss’s research persuaded him that regulations should be minimal — except for financial companies because of the damage they can cause.

The accompanying graphic shows a fascinating correlation. In the years before New Deal regulation of banks and after the easing of regulations began in 1980, bank failures were quite high. So was income inequality.

But from about 1933, when the federal regulation of banks was put in place, to 1980, when Chicago School theories began to shape policy, bank failures were rare. During those years incomes were much more equal, with a prosperous middle class.

Moss notes that critics denounced as a moral hazard the creation of the Federal Deposit Insurance Corp for banks, and similar insurance for other financial institutions, nearly eight decades ago. Knowing the insurance would protect depositors, the critics said, would encourage loose lending practices and leave taxpayers stuck with the costs, an idea still in vogue at the Chicago School when I studied there in 1973.

But, in fact, the opposite occurred. Many bank failures would have meant high insurance premiums, but strict regulation kept failures minimal, lowering costs while giving bankers an incentive to be prudent. That is not part of the anti-regulation Chicago dogma.

CUTS TO LAW ENFORCEMENT

Correlation is not causality, but the fact that income inequality rose as banking regulations were eased makes sense. Freed of restraints, banks got into all sorts of activities that generated fees and saddled clients with high-interest debt. And once banks could collect fees for mortgages without having to worry about repayment — because the mortgages were sold off by Wall Street — the crucial link between reward and responsibility was severed.

With loosened financial regulation it would seem smart to increase law enforcement. Instead, enforcement was cut, as the chart from Syracuse University’s Transactional Records Access Clearinghouse shows. Based on Justice Department internal reports, it shows criminal prosecutions involving financial firms down sharply since fiscal 1999.

These findings about bank failures, income inequality and lack of prosecutions all take us back to the coordinated attempt by the central banks of the United States, Britain, Canada, the European Union, Japan and Switzerland to delay the day of reckoning on European debt.

Central banks can artificially set short-term interest rates, inject liquidity and acquire worthless assets pretty much forever if they deal in their own currency. No sovereign with monopoly control of its currency, as each of these jurisdictions has, can go broke in its own currency.

But that doesn’t mean the price of imprudence has been reduced to zero. Creditors or borrowers must suffer the costs of unsound lending. They should not be allowed to shift that cost onto taxpayers. Given the revolving doors that allow the financial class to move smoothly between government, central banks and financial firms throughout the modern world, and how those in power in all of these places have invested their reputations in Chicago School theories, my educated guess is that taxpayers will be stuck with the costs. Let’s hope I am wrong.

By David Cay Johnston
The opinions expressed are his own.

Taxpayers can expect ever more picking of their pockets by businesses with political clout thanks to the Nov. 21 decision by Judge Theodore Jones and four colleagues on the New York Court of Appeals.

At issue is $1.4 billion in state gifts whose primary beneficiary is a microchip maker, GlobalFoundries, a company controlled by Abu Dhabi’s hereditary ruler, Sheikh Khalifa bin Zayed Al Nahyan, one of the wealthiest people ever. The gifts, labeled economic development grants and made through a state-sponsored corporation, work out to about a million dollar subsidy per job at the plant near Albany.

The New York Court of Appeals said the 50 taxpayers who sued over the deal and over gifts to apple and wine trade associations have no standing to challenge the gift because it is proper.

While this case concerns only New York, it illustrates how corporate socialism has become our de facto economic policy and how the ideal of competitive markets and self-reliance are fading in significance.

State and local gifts to corporations now run at least $70 billion per year nationwide, according to an estimate by Professor Kenneth Thomas of the University of Missouri-St. Louis.

I think Thomas’s estimate is conservative, in good part because many states and local governments make spotty disclosures or low-ball figures.

DISTORTED MARKETS

Not only do these gifts distort markets, they also destroy many entrepreneurial businesses and help a relatively few giant companies with influence earn profits using taxpayer capital.

GlobalFoundries says that upstate New York is a costly place to do business and that, but for the subsidy to offset these higher costs, it would have built the plant elsewhere.

The New York ruling makes future challenges of corporate gifts virtually impossible. The court decided that before having any opportunity to compel testimony or disclosure of documents, plaintiffs must prove a gift is unconstitutional using the standard of proof in criminal cases: beyond reasonable doubt.

Any gift to the sheikh’s company seems clearly at odds with Article VII, Section 8 of the state constitution, which states that “the money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking.”

New York voters prohibited gifts to companies in the 1846 state constitution. The ban came after failed railroad and canal companies stuck taxpayers with their obligations in the 1830s, which accounted for about 60 percent of the state’s debts back then.

And it’s not as if voters said no just once. They affirmed the ban, and strengthened it, in 1874 and again in 1938. Voters were savvy enough to see through a slyly worded proposal to undo the ban on gifts, voting it down in 1967.

So how did Judge Jones, who wrote the decision, along with Chief Judge Jonathan Lippman and Judges Carmen Beauchamp Ciparick, Victoria A. Graffeo and Susan Phillips get around the voters saying no, no, no and no?

They ruled that while the state “may not lend its credit to a public corporation,” nothing “prohibits the State from adopting appropriations directed to” intermediaries who can then give the money, or credit, to private corporations.

A MOCKERY

That’s absurd. To suggest that what the state cannot do directly it can do by passing the money through a separate corporation it created is to make a mockery of the state constitution. Applying the same standard in criminal law would mean that crime family bosses and drug kingpins could escape prosecution by having subordinates do the dirty work.

In a dissent, Judge Eugene Pigott meticulously deconstructed the errors of logic and willful blindness of the majority. He quoted the great jurist Benjamin Cardozo in a case declaring that gifts to World War One veterans violated the gift clause.

Judge Cardozo wanted to allow the gifts to soldiers, writing that the gift ban was not intended to prevent recognizing honorable service to country, but “to put an end to the use of credit of the state in fostering the growth of private enterprise and business.”

Judge Pigott said he was unimpressed by the majority argument that corporate gifts have a long history. “Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time,” he wrote. Amen.

Judge Robert S. Smith heartily endorsed Pigott’s dissent and wrote his own.

The New York Legislature, Judge Smith wrote, “is free to disregard both received economic teachings and common sense … But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this Court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed.”

Taxpayers deserve to be more than annoyed at judges who concoct arguments to justify taking from all to give to the select few, in this case to the fabulously wealthy ruler of Abu Dhabi, who hardly needs a subsidy. All voters can do is hope that one day judges who are not in the thrall of corporate interests will put the public interest, and the plain language of the state constitution, first.

Photo: A handout picture from Emirates News Agency WAM shows Emirati President Sheikh Khalifa bin Zayed bin Sultan al-Nahyan (R) greeting Omani sultan Qaboos bin Said in Abu Dhabi July 11, 2011. REUTERS/WAM/Handout